- Work out the cost of replacing as new all your possessions, with the possible exception of clothes and household linen, for which you should make a deduction for wear and tear. Which items are to be costed as new and which are to be costed with a wear-and-tear deduction will depend on the policy you are buying.
- The cost of replacing everything (either as new or with a wear-and-tear deduction) is the sum you must insure for. If you under-insure, any claims, including small claims, could be scaled down in proportion to the level of your under-insurance.
- Putting a replacement cost on every item in the home could be huge task and it may involve a lot of guessing, making the final figure an approximation only. Inevitably, many people make an intelligent estimate. If that's your approach, don't underestimate. You might be surprised at how much you would have to pay out if you needed to replace every item.
- You could err on the side of caution by overstating the replacement cost of all your possessions. Bear in mind that your premium would then be higher than it need be. And while there's a serious disadvantage in under-insuring, when it comes to claiming there's no advantage in being over-insured.
- Many policies automatically index-link your cover each year - that is, they increase the sum insured by the rate of inflation as measured by the retail prices index. Do review the level of cover from time to time. Index-linking may not be sufficient if you are steadily getting more prosperous and acquiring more valuable possessions.
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